Sunday, January 27, 2013

Republicans must mark their budget territory

Published in The Tennessean, Sunday, January 27, 2013 and at
FORBES with archives.

Richard J. Grant

There is an obvious reason why Republicans, despite holding a majority in the U.S. House of Representatives, keep appearing to lose their fiscal standoffs against the Democrats who control the White House and the Senate.

In both of the post-election fiscal fights, first over the “fiscal cliff” and then the “debt ceiling” standoff, standing fast would trigger consequences that most Americans would find undesirable. The party to flinch first would be the one that is less certain of its esteem in the eyes of the electorate.

On the fiscal cliff, Republicans accepted a compromise on tax rates in order to avoid an automatic increase in all income tax rates. Few doubted that such across-the-board tax-rate increases would further depress the economy, so Republicans gave the president his more-modest requested tax increases in the forlorn hope that the electorate would exhibit the Wisdom of Solomon in their judgment of the accord.

The debt ceiling is a problem for Republicans only when it is viewed in isolation from the events that make it important. When the U.S. government spends more than its revenues during any significant period, the shortfall would be financed by credit until the borrowings could be covered by a surplus. Over the years, cumulative federal budget deficits have exceeded surpluses by just over $16.4 trillion, which is the current total of the formal national debt.

Up until the U.S. entered World War I, Congress had to approve the issuance of Treasury debt. This kept congressional attention on the consequences of deficit spending, whether those deficits were planned or the result of historical accident. But to facilitate the extraordinary demands of war finance, Congress set a statutory debt limit up to which the Treasury could borrow as needed without further authorization.

The existence of the debt ceiling, and the periodic reluctance of some congressmen to raise it, is often portrayed as an unnecessary impediment to the proper execution of the Treasury’s duties. But the debt limit does not give Congress any more power than it had before. Those who wish to eliminate the debt limit must understand that its elimination would not give the Treasury the freedom to borrow at will. It would still be necessary for the Congress to approve all borrowing.

When, in the minds of the electorate, the congressional spending decision becomes separated from the financing decision, voters lose sight of the fact that the whole debt-limit issue arises due to deficit spending. It also tends to obscure the fact that as government spending grows relative to the size of the economy, eventually the economy tends to grow more slowly. As tax rates are raised, in an attempt to “pay for” the expenditures, it becomes increasingly difficult and more expensive in terms of lost production to raise each new dollar of tax revenue.

When seen for what it represents, our repeated confrontations with the debt ceiling should serve to remind us that the perceived benefits of government spending cannot ultimately be separated from their cost. But a statutory debt limit is a poor substitute for a constitutional balanced budget amendment. Painless lessons are ignored by those statists who would with impunity exploit the weaknesses of the electoral flesh.

If the best that the Republicans can do is to pass a bill that hopes to balance the budget in 10 years, then there is little credibility in attempts to use the debt ceiling as leverage to force Democrats to accept any significant spending limits. If Republicans are serious about restraining the size of government then, even with a divided Congress, they must mark their territory. Mark or be marked.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com 

Sunday, January 06, 2013

When Capital Trickles Away, Not Down

Published in The Tennessean, Sunday, January 6, 2013 and at
FORBES with archives.

Richard J. Grant

Although nature presents us with an adequate array of obstacles, many of society’s most formidable ills are self-inflicted, most potently through the ballot box. The framers of the U.S. Constitution were rightly wary of the dangers of unfettered democracy. They understood that most parts of our lives should be set apart, protected from the reach of voters.

Over two centuries later, voters seem no more reliable. They can find all sorts of reasons to meddle in other people’s lives through the magic of government. They seem more able to imagine the wonderful things that governments might do than they are able to imagine the costs. Imagination is often untethered to education.

Those who would wish the government more tax revenue, would also have us believe that taxes are benign in their impact on business. After all, in the past century we have had some of the highest corporate and personal income-tax rates in the world, but we have also had plenty of profitable companies and prosperous individuals.

If we ask the owners and managers of these profitable companies how taxes affected their operations, we will always find some who will claim that they simply took taxation in stride. Even those managers that criticize taxes for reducing profitability and possibly putting their businesses at risk can be, and often are, dismissed as merely greedy or uncaring. They were, after all, profitable.

The problem with our question is that we were asking only those that were profitable or, to put it differently, those companies that have continued to operate. We tend to lose track of companies that no longer exist and we rarely have any inkling of all those planned businesses that might have come into existence had business conditions, such as tax burdens, been better.

When we base our judgments of a situation mostly on the experiences of those who succeeded, our judgments may suffer from what statisticians call ...


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears fortnightly on Sundays. E-mail messages received at: rjg@richardjgrant.com

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